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Pandora Media's Q1 Earnings: Record User Engagement, but Still a Net Loss

Widening losses in the face of competition does not look good.

Music streaming service Pandora Media(NYSE:P) reported first-quarter earnings after the market closed April 23, and despite record high user engagement and rising revenue, the company posted a larger net loss this quarter than the same period last year.

Rising revenue and listener hoursDuring the quarter, the company raised revenue to over $230 million, up 19% year over year. Thanks to total user engagement that was a record high of 22.3 hours per active user per month (5.3 billion listener hours total), as well as increases in local advertising, advertising revenue grew 27% over the same period last year, to nearly $179 million, or about 78% of total revenue.

ButPandora still reported a net loss of $48.3 million, even more than the $29 million in net losses the company reported during the same quarter last year. Why is the company still reporting net losses despite increases in revenue? Part of the reason seems to be increased music licensing costs, but that alone doesn't account for such a large loss.

The main reason might be the investments the company says it is making in its service to keep up with competition. As CEO Brian McAndrews said:"We've been actively investing in every part of our business-from the music we play, to the ad technology and music maker products we offer."

He goes on to say that those investments are paying off in that listener hours and ad revenue continue to grow, even with increased competition from other music streaming services. Those investments are not making it to the bottom line yet, but at least Pandora is making investments to stay relative, which will be tougher and tougher in the face of growing competition.

More competition in 2015 than everCompetition has continued to be a headwind for Pandora, and this quarter was no exception. Big-name competition like Apple iTunes and Amazon.com Prime Audio has been a threat for a while, but during March Amazon released its own radio-style streaming service called "Prime Stations" which directly competes with Pandora's service. iTunes already has a similar "iTunes Radio" service.

And it's not just big names that are a threat, but increasingly start-ups, too. Earlier this month the privately held music streaming and downloading service Spotify underwent another round of investor financing, and reached an astounding $8.4 billion valuation, more than double Pandora's market cap. Spotify also has a radio-style service. A plethora of other small streaming music services is popping up, including TIDAL, which is backed by artists such as Jay-Z and Madonna, so clearly Pandora is in for more competition this year than ever before.

All of this new competition is not only a threat to user growth rates, but also could fuel lower advertising margins as supply increases. Since Pandora gets nearly 80% of its revenue from advertising, that could be a major issue going forward.

The futureThere are some major competitive headwinds for Pandora going forward, but let's not forget that it is still growing its active user base, total listening hours, and revenue. As of 2014, the company boasted more minutes-per-user spent on its app than any other company, including Facebook, and the increase in total hours spent on the app this quarter will likely keep the company in first place. The company's profitability issues seem to be in that it is still acting like a start-up, investing for more future growth instead of driving cash to the bottom line.

As investors, we do want to see income, and if not income, then definitely not widening losses. As new competition already looks well-suited to compete with Pandora's main offering (streaming "stations" that allow for relaxed music listening and new artist discovery is now offered by about every major streaming service), we hope Pandora hasn't skipped too far ahead on turning that revenue into profit.

Shares of Pandora are down more than 50% since their highs at the end of Q1 last year and they dropped in after-hours trading after Thursday's report. As for the future of this company, even if it can't turn into a hugely profitable service, it could still be a viable acquisition target for a large company that would be happy to have Pandora's 82 million active users. But without any signs of that yet, and with widening losses reported this year in the face of increasing competition, it might be time to push pause on this one.